ETF Chart To Watch: Rydex CurrencyShares Japanese Yen (FXY)

by on February 15, 2011 | ETFs Mentioned:

Equities got off to a quiet start on Monday, with major domestic indexes trading flat for the most part, save for the energy sector which managed to surge higher on the day. Wal-Mart shares traded over 1% lower on the session after JP Morgan cut its rating on the retail giant. Analysts are citing the company’s difficulty in generating revenue growth and that this is likely to continue in the coming quarters given the level of economy recovery across the nation, a situation that has pushed the price target for 2011 down to $54 a share (previously $59) . Wall Street also digested President Obama’s budget proposal, which calls for reducing the deficit by $1.1 trillion over the next 10 years and its impact on equities going forward. To top it all off, gold edged higher by a few points while crude oil traded just below $85 a barrel.

Currency markets are also going to be in the spotlight this week, with an onslaught of performance metrics coming out of Eurozone, including GDP, trade balance, and the United Kingdom’s quarterly inflation report. On the other end of the globe, the Bank of Japan is expected to announce their interest rate decision as well as commentary regarding economic outlook. As a result, Rydex CurrencyShares Japanese Yen Trust (FXY), is flying onto our radar screen this week given that the fund is trading at historically significant levels and the fact that it tracks the US Dollar/Japanese yen exchange rate. FXY is likely to see trading volumes pick up, after the Bank of Japan makes its decision on Tuesday, February 15th. Analysts are expecting for the rate to remain unchanged at 0.10% [see Three ETFs To Watch During The Great Currency War Of 2010].

Long-Term View

Whenever engaging in analysis of any sort, whether technical or fundamental, it always helps to first think “big picture”. When we take a look at FXY’s monthly chart below, the first step is to simply recognize the various “up”, and subsequent “down” trends, that the fund has gone through. Starting from inception, it’s quite clear that the fund trended upwards, until coming to a top in March of 2008, after which the fund declined for about five consecutive months. If you keep following the chart, you can see that after every significant uptrend, FXY has proceeded to decline, and enter into a subsequent downtrend. When we focus on the most recent uptrend, which started in May of 2010, it’s important to notice that following the peak in November ($123.10 per share), FXY has been slightly trending lower in the subsequent months. Given that FXY has failed to set a high past $123.1 in the recent months, its evident that the fund has perhaps topped out, and is transitioning into a “correction-phase”. History has a tendency to repeat itself, and after a quick glance at the monthly chart below, intuition tells us that FXY is due for a reasonable correction before it can reasonably continue to surge higher [see What's Gotten Into Yen ETFs?].

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Short-Term View

After we have an idea of where the security is trading right now relative to significant levels in the past, it’s time to shift our perspective and focus on a shorter time frame. When we look at FXY’s 1-year daily chart below, we can see that the fund’s last uptrend started on May 5th of 2010 ($104.56 a share) and lasted up until November 1st, when the fund topped out at $123.10 a share. Since then its evident that the fund has been trending lower, managing to set lower highs and lower lows, and currently its trading just below $118 a share. By drawing a Fibonacci Retracement, starting from the funds low up until its high (of the last uptrend), we get projections of likely levels that the security may retrace down to [see Fibonacci Explained With CORN]. When we take a closer look, it become clear that FXY has closed below the first support at the 23.6% retracement level. Likewise, the next  level that FXY is projected to retrace down to is around $116 a share, which happens to be both a 38.2% retracement level and the fund’s 200-day moving average (yellow line).

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Technical analysis is telling us that FXY likely needs to retrace before it can continue its past uptrend. If we employ a conservative Fibonacci Retracement, we see that $116 a share seems like a reasonable level for the fund to come down to, given that it is near both the 200-day moving average and the 38.2% retracement level. Also, its critical to note that the fund has closed below its 50-day moving average (blue line), which implies that it is in a downtrend relative to the past 50 trading days. If we go back in history, it is evident that the fund has a tendency to retrace down towards its 200-day moving average, and a close below its 50-day average is a strong signal that a downtrend is in fact developing [also read Three Reasons Why Japanese Yen ETFs Are Headed For A Crash].

Given the interest rate decision coming up, it’ll be fascinating to see if the fund follows the technical forecast or somehow manages to establish support at the current level. With currency trading especially, it’s crucial to remember that news and government policy always take precedence over any kind of technical indicators. Traders and investors alike are advised to wait and see what the decision is, as well as any commentary offered by the bank, before adding or subtracting from their FXY positions. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

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Disclosure: Stoyan holds January 2012 Puts.